IR35 and Off-Payroll Rules: Do They Apply to Me?

‍‌​​​‌​‌‌​​‌​‌‌‌‌​‌​​‌‌‌​‌​​‌‌​​‍> Disclaimer: SiteKiln gives you plain-English information, not legal or employment advice. Talk to a qualified professional before making big decisions.

The short version

IR35 decides whether you're taxed like an employee or a business. If you work through a limited company (a PSC) but HMRC reckons you'd be an employee if the company wasn't in the middle, you're "inside IR35" -- and you pay tax like a PAYE worker, but without the employment rights. Get this wrong and the tax bill is brutal.

Why this matters in construction

Construction has one of the highest rates of limited company contracting of any sector. Somewhere between 30% and 40% of the workforce operates as contractors, and many of those work through a PSC. The flexibility suits the project-based nature of the work -- you finish a job, you move on.

But IR35 doesn't care about industry norms. It cares about what actually happens on site, in practice, between you and the company paying you. If the reality looks like employment, HMRC will treat it as employment -- regardless of what your contract says or how you invoice.

Since the off-payroll reforms hit the private sector on 6 April 2021, the responsibility for getting this right shifted away from you (in most cases) and onto the company hiring you. That changed the game. And with employer's NICs rising to 15% from April 2025 -- alongside a reduction in the secondary threshold from £9,100 to £5,000, meaning employer's NICs now kick in much earlier on each worker's earnings -- plus new small company threshold changes from April 2026, the landscape is shifting again.

What IR35 actually is

IR35 is shorthand for the Intermediaries Legislation, introduced in the Finance Act 2000. It targets a specific arrangement: you provide your services to a client, but instead of being hired directly, you work through an intermediary -- usually your own limited company (your PSC).

The question IR35 asks is simple: if you took the limited company out of the picture, would the relationship between you and the client look like employment?

• If yes -- you're inside IR35. Tax and NICs get deducted as if you were an employee.
• If no -- you're outside IR35. You invoice through your company, pay yourself through dividends and salary, and manage your own tax.

The financial difference is significant. A contractor on £500 a day outside IR35 can take home roughly £15,000 to £20,000 more per year than the same contractor on the same rate inside IR35. That's not rounding. That's the difference between a comfortable year and a tight one.

The three tests HMRC uses

These are the same principles from the Ready Mixed Concrete case (covered in 3.1), applied to the IR35 context:

1. Control

Who decides how, when and where the work is done? If the client sets your hours, tells you how to do the work, and manages you like one of their own staff -- that points inside. If you have genuine autonomy over your methods, schedule and approach -- that points outside.

The question isn't just whether the client does control you, but whether they have the right to. Even if they leave you alone day to day, if the contract or reality gives them the power to direct how you work, that counts.

2. Substitution

Can you send someone else to do the work? Not on paper -- in reality. If you have a genuine, unfettered right to provide a suitably qualified substitute and the client would accept them, that's a strong indicator you're outside IR35. If the client hired you specifically and wouldn't accept anyone else, that looks like personal service -- and personal service looks like employment.

In construction, this one cuts both ways. Some PSC contractors genuinely do send other people. Many others couldn't send a substitute even if they wanted to -- the site induction is in their name, the CSCS card is theirs, and the client wants them personally.

3. Mutuality of obligation (MOO)

Is the client obliged to keep offering you work? Are you obliged to accept it? If you're engaged project by project with no ongoing commitment either way, that supports outside IR35. If you've been on the same site for two years and both sides treat it as a rolling arrangement with no real end date -- that looks a lot more like employment.

No single test is decisive. HMRC and tribunals look at the overall picture across all three, plus other factors like financial risk, who provides equipment, and how integrated you are into the client's business.

Who decides your IR35 status?

This depends on the size of the company hiring you:

A company is "small" if it meets at least two of these thresholds:

• Annual turnover: not more than £15 million
• Balance sheet total: not more than £7.5 million
• Number of employees: 50 or fewer

Those thresholds were updated from April 2025 (up from £10.2m turnover and £5.1m balance sheet). From April 2026, around 14,000 companies previously classified as medium will drop to small -- meaning responsibility for IR35 shifts back to the contractor for those engagements.

In plain terms for construction: most of your main contractors and tier-one firms are medium or large. They decide your status. Smaller builders, specialist firms and domestic-scale outfits are more likely to be small -- and if they are, it's on you.

Inside IR35 -- what actually happens

If your engagement is determined to be inside IR35:

• The fee-payer (whoever pays your PSC -- usually the agency or client) deducts income tax and employee NICs from your invoice before paying you.

• They also pay employer's NICs at 15% (from April 2025) on earnings above the secondary threshold of £5,000 -- down from £9,100 the year before. On smaller engagements or lower day rates, that threshold drop hits harder than the rate rise itself.

• You receive a net payment. The money that hits your company account has already been taxed.

• You get a 5% flat-rate expense allowance deducted before the deemed payment calculation -- but that's it for expenses.

• You lose most of the tax efficiency of running a limited company. Dividends, salary splitting, retained profits -- all largely gone for that engagement.

• Your PSC still exists. You can still invoice. But the financial benefit of operating through it on that contract is gutted.

To maintain the same take-home you'd get outside IR35 on a £500/day rate, you'd need to charge roughly £614 a day inside -- a 23% uplift. Most clients won't pay that, which is exactly why IR35 determinations matter so much.

Outside IR35 -- what that looks like

If you're genuinely outside IR35:

• Your PSC invoices the client or agency. They pay the full amount including VAT.

• You pay yourself a combination of salary (usually low, to minimise NICs) and dividends from company profits.

• You can claim legitimate business expenses through your company.

• You manage your own Corporation Tax, dividend tax, and Self Assessment.

• Your effective tax rate is lower -- typically mid-30s% versus low-to-mid 40s% inside IR35 on the same gross.

But "outside IR35" isn't a free pass. It means you are running a genuine business: multiple clients (ideally), financial risk, your own equipment, genuine substitution rights, and real autonomy. If HMRC investigates and the reality doesn't match, you're liable.

HMRC's CEST tool -- use it, but don't trust it blindly

HMRC provides a free online tool called Check Employment Status for Tax (CEST). Clients are encouraged to use it when making determinations.

The problem: independent analysis by ContractorCalculator, based on Freedom of Information requests to HMRC, found that CEST only gave an accurate result in 14 out of 24 key employment status cases -- 58% accuracy. Seven results were flat wrong. Three were right but for the wrong reasons. HMRC disclosed that it holds no detailed testing data beyond internal workshops -- it has no record of how each question was answered during testing, only the end determination.

HMRC says it will stand by the CEST result provided the information entered is accurate. But "accurate" is doing a lot of heavy lifting there. If the questions are answered based on what the contract says rather than what actually happens on site, the output is worthless.

Use CEST as a starting point. Do not use it as the final word. If the money involved is serious, get a proper status review from someone who knows what they're doing.

The Status Determination Statement (SDS)

If a medium/large client or public sector body determines you're inside IR35, they must give you a written Status Determination Statement explaining why. They must also:

• Take reasonable care in reaching the determination -- a blanket "everyone is inside" approach doesn't meet this standard.

• Have a disagreement process so you can challenge it.

• Keep detailed records of all determinations and their reasoning.

If they don't take reasonable care, the liability for any unpaid tax can transfer from the fee-payer back up the chain to the client. That's a powerful incentive for them to get it right -- and a powerful argument for you if they've been lazy about it.

What to do if you get an "inside" determination you disagree with

• Read the SDS carefully. What reasons have they given? Do those reasons match the reality of how you actually work?

• Use the client's disagreement process. They're legally required to have one. Put your challenge in writing. Be specific -- "I have genuine substitution rights and here's the evidence" beats "I disagree".

• Gather evidence. Your own contracts with other clients, proof of substitution, evidence of financial risk, your business website, your own insurance, your own equipment. Build a picture that shows you're running a real business, not filling a seat.

• Get a professional status review. An independent assessment from an IR35 specialist carries weight. It also helps you understand whether the client might actually be right.

• Know your options. If the determination sticks and you don't agree, you can walk away from the engagement, renegotiate your rate to reflect inside-IR35 reality, or continue and challenge through other channels.

The construction-specific traps

IR35 hits construction in specific ways that don't always apply to IT contractors or office-based consultants:

• Long-term site placements. If you've been on the same site through the same PSC for 18 months, that's harder to argue as project-based self-employment than a genuine three-month specialist engagement.

• CIS and IR35 overlap. Being paid through CIS doesn't resolve your IR35 position. CIS is a tax deduction mechanism. IR35 is an employment status test. You can be on CIS and inside IR35 -- meaning the client should really be running you through PAYE, not CIS. Many construction firms don't fully understand this overlap.

• Labour-only subcontracting. If you provide nothing but your own labour -- no materials, no equipment, no helpers -- and work under the client's direction on their site, the IR35 indicators stack up fast.

• Blanket determinations. Some main contractors have taken the approach of putting all PSC contractors inside IR35 to avoid the admin and risk of assessing each one individually. That's convenient for them but may not reflect reality -- and it doesn't meet the "reasonable care" standard if they haven't actually assessed each engagement.

What happens if you get it wrong

If you're the contractor (small company client, self-assessing):

• HMRC can investigate and raise a deemed payment for all the tax and NICs that should have been paid.
• Interest and penalties on top.
• If your PSC can't pay, HMRC may pursue you personally in certain circumstances.
• The investigation can go back multiple years.

If you're the client (medium/large, making the determination):

• If you fail to take reasonable care, the tax liability can transfer to you -- the end client -- rather than staying with the fee-payer.
• Backdated employer's NICs at 15%, plus the employee tax and NICs that should have been deducted.
• On a workforce of even a handful of PSC contractors over several years, that becomes a very large number very quickly.

The April 2026 shift -- what's changing

See the table above. From April 2026, roughly 14,000 companies currently in the "medium/large" column will drop into the "small" column -- and with them, the responsibility for IR35 shifts back to the contractor.

If you're contracting through a PSC with one of those newly-small companies:

• The responsibility for determining your IR35 status shifts back to you.
• The client no longer issues an SDS or runs the disagreement process.
• You must self-assess, document your reasoning, and stand behind it if HMRC comes knocking.

If you were previously determined "inside" by that client, you'll need to reassess under the original 2000 IR35 rules -- and you may reach a different conclusion, but you need to be able to justify it.

If you're working through an agency that supplies you to a newly-small client, the agency also loses its fee-payer obligations for that engagement. Check your supply chain and understand who is now responsible for what.

The practical steps

• Know who's deciding. Is your client small, medium/large, or public sector? That tells you who carries the IR35 responsibility.

• Review every engagement separately. IR35 applies per contract, not per person. You can be outside on one job and inside on another.

• Make the contract match reality. A contract full of substitution clauses and "no MOO" language is useless if you turn up at 7am every day, do what you're told, and wouldn't dream of sending someone else.

• Keep evidence. If you're outside IR35, build a file: other clients, your own insurance, equipment purchases, evidence of substitution, evidence of genuine business risk. You may need it years later.

• Don't rely on CEST alone. Use it as one input. Get professional advice if the stakes are high.

• If you're inside, price accordingly. A 20--25% rate uplift is realistic to maintain the same take-home. If the client won't pay it, you need to decide whether the engagement still makes financial sense versus going permanent or finding an outside-IR35 role.

What to do next

• Find out whether your client is small, medium/large, or public sector -- this determines who is responsible for your IR35 status.
• Review each of your current engagements against the three tests: control, substitution, and mutuality of obligation.
• Run the HMRC CEST tool as a starting point, but do not rely on it as the final word.
• If the stakes are high, get a professional IR35 status review from a specialist adviser or accountant.
• Keep evidence of genuine self-employment: other clients, your own insurance, equipment purchases, and any instances of substitution.

Sources

• Finance Act 2000 -- Intermediaries Legislation (IR35)
• Income Tax (Earnings and Pensions) Act 2003, Part 2, Chapter 8 (off-payroll working rules)
• The Off-Payroll Working Rules (private sector), effective 6 April 2021
• HMRC guidance: Understanding off-payroll working (IR35) -- GOV.UK
• HMRC guidance: Off-payroll working for clients -- GOV.UK
• HMRC Check Employment Status for Tax (CEST) tool
• ContractorCalculator -- independent analysis of HMRC CEST tool accuracy based on FOI-disclosed case law testing (2018)
• Companies Act 2006, s.382--383 (small company thresholds, as amended)
• Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497
• Autoclenz Ltd v Belcher [2011] UKSC 41

This guide is for information only. It is not legal or tax advice. If you need advice on your IR35 status or a specific engagement, speak to an accountant or IR35 specialist. Do not use this page as a legal or tax defence.

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